Landlords Can Benefit From Targeting Professional Services Providers as Tenants

It’s no secret that with vacancy rates reaching record highs, shopping center landlords have been more willing to accept non-retail tenants, including medical offices, schools and religions institutions. What few might realize, however, is that working with non-retail uses can sometimes be a boon for shopping centers, especially when it comes to professional services tenants such as financial advisors, insurance companies and accounting firms.

These types of tenants tend to accept longer lease terms than traditional retailers, are financially sound and often bring in additional traffic to the centers they are in, says Andre Koleszar, Atlanta-based vice president and regional officer with Regency Centers, a Jacksonville, Fla.-based shopping center REIT with a 44.9-million-square-foot portfolio. On average, professional services firms sign leases for 10 years, while a standard lease for a retailer would involve a five-year term.

“My perspective on them is they are great tenants to have. They tend to draw clients that might not otherwise come to the shopping center, most of them are quite solvent, we will likely enjoy a longer-term deal with them and they tend to renew. It’s a great return on investment,” says Koleszar.

Attracting a professional services firm to a retail property, however, is no easy task. They tend to be sophisticated tenants with a unique set of requirements for their retail locations and, especially in today’s economic climate, are very concerned about spending money wisely, notes Greg Schuster, senior vice president and principal in the corporate services division of Cassidy Turley, a national commercial real estate firm. Schuster, who is based in the company’s St. Louis office, represents such clients as Allstate Insurance, Edward Jones Investments and H&R Block.

Professional services firms that operate on a national or international basis usually hire well-established real estate organizations to handle their retail leasing, but even regional and local professional services tenants usually have good representation, according to both Schuster and Koleszar.

As tenants they tend to be just as savvy as any good credit national retailer. Where they differ is in their site requirements. While operators of retail concepts usually care most about things like the size of a center’s trade area and co-tenancies, professional services firms look more closely at the center’s visibility and the profile of the people living in the area, says Schuster.

For example, a financial advisor like Edward Jones would base its site selection decisions not only on income levels, but also on factors like average net worth of individuals in the center’s vicinity. An auto insurer might look at the number of driver’s in a typical household and how many people get new driver’s licenses on an annual basis. In addition, professional services firms tend to be much more concerned about the image of the center they are in and the center’s operator than are traditional retailers.

“In the case of many financial services companies, the customers who are [coming to] the location, may or may not have their first contact with the organization at that site,” says Schuster. “Those businesses are not relying on impulse stops the way many retailers are. So the overall image of the center is going to be important to them. They are going to want a clean, professional, comfortable environment that their customers are comfortable coming to address their financial needs in.”

As a result, professional services tenants prefer to work with landlords that have a good reputation in the industry and assess centers not only on demographic criteria, but also on their physical maintenance and cleanliness. They also want convenient access and good site visibility to attract new customers, Schuster notes. And while the presence of an anchor might not be important to every professional services firm, in Koleszar’s experience they tend to prefer well-established grocery-anchored properties.

When it comes to negotiating leases, professional services tenants usually look for spaces with traditional 20 foot by 60 foot layouts ranging from 1,200 square feet to 2,000 square feet, although some banking institutions might take locations that are as large as 10,000 square feet.

They generally ask for $5 to $10 more per square foot in tenant improvement (TI) allowances than would a retailer or, in some cases, for turn-key spaces that only need the addition of furniture. That expectation comes partly from the fact that professional services firms are used to negotiating leases with office landlords, who normally finance their tenants’ build-outs, says Koleszar.

But even though bringing in a professional services provider might carry a higher upfront cost than would a lease with a traditional retail space user, the landlord can take comfort in the fact that it will have a financially viable, stable, long-term tenant on the property that might bring in wealthier customers, he notes.

Today, professional services firms make up about 2.1 percent of Regency’s tenants. When Regency’s grocery anchor tenants are taken out of the equation, that’s a considerable number, notes Koleszar. Just last week, the company signed a 1,200-square-foot lease with Edward Jones Investment at its Middle Creek Commons center in Raleigh, N.C.

In fact, while professional services firms continue to keep a tight rein on their budgets, they are still signing new leases, says Schuster.

“We’ve had clients that we’ve added hundreds of locations for even in a down [period] last year,” he notes.